Jiří Fialka, Partner, Actuarial & Insurance Solutions Seminář z aktuárských věd, 25....

Jiří Fialka, Partner, Actuarial & Insurance SolutionsSeminář z aktuárských věd, 25. listopadu 2005

IASP4: Investiční smlouvy.

Oceňování investičních smluv a smluv o

službách

Agenda

Measurement

Investment Contracts

– Amortised costs

– Fair value

Service Contracts

Source

International Actuarial Standard of Practice No.4, Practice Guideline:

Measurement of Investment Contracts and Service Contracts under IFRS [2005]

as prepared by the International Actuarial Association, published 16 June 2005

OCEŇOVÁNÍ

Initial measurement of investment contracts

IAS39.43:

Fair Value

+ directly attributable transaction costs (does not apply to liability at FV through PL)

Interpretations:

1) Some transaction costs to be subtracted from liability

2) All transaction costs and fees relate to the investment management contract and should be deferred

Treatment of transaction costs

IAS 39 prohibits the deferral and amortisation of transaction costs for financial instruments through the concept of a deferred ACQUISITION COST asset.

In respect of service contracts the IFRSs permit transaction costs for the service element to be deferred to match the related fees (IAS 18, Appendix A, paragraph 14(b)(iii)).

Subsequent measurement

Depends on the accounting policy:

at amortised cost, using the EFFECTIVE INTEREST METHOD

except for financial liabilities measured at fair value through profit and loss

If the reporting entity’s policy does not specify, then the practitioner may choose to apply an internally consistent approach and document the approach selected…

INVESTIČNÍ SMLOUVY: MODELAMORTIZOVANÝCH NÁKLADŮ

Amortised cost model - appoach

Not deferred initial fees covering transaction costs are subtracted from the liability and treated as one of the cash flow items in calculating the effective interest rate

Cash flows typically would be developed based on expected surrenders

Margins for risk and uncertainty are NOT included in the cash flows The expected cash flows normally would be determined for each

duration and, therefore, it would be appropriate to select an appropriate probability distribution for each duration

Appropriate requirements under IFRSs, such as a minimum floor, would apply.

Amortised cost model – technical aspects

administrative costs are not to be included in the projected cash flows

contractual loadings or fees would be included in the projected cash flows

inclusion or exclusion of renewal payments may be part of the accounting policy

non-DPF bonuses should be included

Amortised cost model – Minimum floor

IAS 39, AG30(g) (also BC94)

If the surrender value is more than the amortised cost of the liability, and

the surrender value is more than the fair value of the benefit at maturity

the reporting entity should measure the investor’s option to surrender at the expected surrender value. This would be an embedded derivative and would be measured as such.

This also would provide an effective minimum floor for financial instruments on an amortised cost measurement.

INVESTIČNÍ SMLOUVY: MODELFÉR HODNOTY

Fair value model - approach

Selection of an appropriate model

Selection of current estimate assumptions

The determination of margins for risk and uncertainty

Availability of market data to calibrate the provisions for risk and uncertainty

Application of the requirements of IFRSs

Market Value Margins

Margins for risk and uncertainty need reflect the compensation for risk required by a typical third party to take on the liability.

It may not be necessary to include a margin in respect of every assumption, and the selected risk margins need not imply a particular level of confidence.

There is no commonly accepted practice for the application of the concepts.

Market Value Margins (2)

Uncertainty may result from one or more: Errors of estimation that may be favourable or adverse Deterioration or improvement Statistical fluctuation.

A larger margin is appropriate if: There is less confidence in the current estimate assumption The event is further in the future The potential consequences of the event assumed are more severe The occurrence of the event assumed is more subject to statistical

fluctuation The risk is not diversifiable.

Assumptions, calibration, minimum floor

In the FINANCIAL REPORTING period in which a financial instrument is first recognised, adopting assumptions different from pricing assumptions … would need a good reason

IAS 39.49 requires at each valuation date a fair value that is at least equal to the amount payable on demand

which means

Fair Value ≥ Surrender Value

SMLOUVY O SLUŽBÁCH

Service contracts: approach

Revenue is recognised by reference to the stage of completion of the services

The fees need to be allocated among services according to the nature and substance of the services provided

Reliable cash flows are needed to measure the expected revenue and the stage of completion of the transaction needs to be reliably determined

Margins for risk and uncertainty will NOT normally be included in the cash flows

Requirements under IFRSs apply

Front-end fees

IAS 18, Appendix A, paragraph 14(a)(iii)

Front-end fees are deferred in the same manner as transaction costs.

If it can be shown that such fees are directly related to the transaction cost, they can be netted with simultaneously incurred transaction cost.

Otherwise, deferral of front-end fees and of transaction costs are to be separated, the first a liability, the second an asset, with no off-set allowed .

Transaction costs

The transaction cost is amortised in proportion to the nature of the service fees as outlined in the IFRSs.

Projection of the total fees to amortise the transaction cost over the life of the contract, for example, a portion of the investment management fees.

Amortisation of deferred transaction cost and the test on recoverability can be based on a portfolio level.

Other requirements

IAS 18, Appendix, paragraph 14(b)(iii)

Recoverability test at a portfolio level

For more guidance refer to IAS36, IAS37, IAS38, and IASP6 Liability Adequacy Testing, Testing for Recoverability of Deferred Transaction Costs, and Testing for Onerous Service Contracts under IFRS [2005]

Copyright © by Deloitte & Touche, 2004. This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside of the client organization without prior written approval from Deloitte & Touche.

Jiří Fialka, Partner, Actuarial & Insurance Solutions Seminář z aktuárských věd, 25....

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